ASIC alleges ASX misled market over blockchain-based settlement project

The market operator copped an estimated $250 million impairment charge in late 2022 in relation to the project, which was aimed at replacing the traditional CHESS settlement technology but was abandoned after an independent review from Accenture identified significant flaws.

The ASX had been readying the market and regulatory agencies for a CHESS system replacement since October 2020, and engaged software developers and vendors to start testing the application-in-progress earlier in April 2019.

The Australian Securities and Investments Commission (ASIC) has taken aim at the ASX over announcements made in February 2022 claiming the replacement was “on-track for go-live” in April 2023 and was “progressing well”.

"Our new CHESS system will be at the leading edge globally, with a DLT (distributed ledger technology) system capable of managing a multitrillion dollar ecosystem with millions of trades and billions of value turning over every day," the market operator stated on 10 February, 2020.

"It is meeting its availability and stability targets. The team has plenty of work ahead, as we now transition to the industry stage."

In proceedings commenced in the Federal Court, ASIC alleges the ASX's statements were misleading and deceptive because, at the time of the announcements, the project was not tracking to plan and ASX did not have any reasonable basis to imply the project was on track to meet future milestones.

"ASX’s statements go to the heart of trust in the integrity of our markets. We believe this was a collective failure by the ASX board and senior executives at the time," says ASIC chair Joe Longo.

"Companies and market participants rely on what the ASX says about its operations to make their own decisions and investments. 

"We expect the ASX to be a place to list and invest with confidence. When the ASX falls short, it has wide ranging consequences across the market."

Longo says the ASX's CHESS replacement was a technology project of fundamental significance, replacing critical national infrastructure crucial to the operation of the Australian economy.

"Its critical importance was all the more reason ASX needed to ensure it told the Australian public the truth about how the project was tracking and whether it would be completed on time," he says.

"We allege that the true state of affairs as at 10 February 2022 was that the project was not 'progressing well', contrary to ASX’s announcement.

"The delay and subsequent pause of the project in November 2022 caused significant cost to ASX and market participants who relied on assurances as to the progress of the project and scheduled go-live date.

"The CHESS replacement project must be managed effectively and transparently. Failure to do so can lead to a lack of confidence in Australia as a market to attract investment."

In a concise statement filed with the Federal Court, ASIC highlights that the ASX's Corporate Governance Principles and Recommendations must be adopted by ASX-listed entities, instilling "a culture of acting lawfully, ethically and responsibly" while highlighting the importance of market announcements being accurate.

"By reason of the misleading conduct referred to above, ASX undermined the principles it promotes for itself and other listed entities," ASIC alleges.

"Further, by the misleading conduct, ASX, as a listed entity itself, risked causing harm to its shareholders and potential shareholders.

"In addition, market participants, other market operators, and service providers incurred, or were exposed to the risk that they would incur, sunk costs in preparation for a 'go-live' of the CHESS Replacement Project or the CHESS Replacement System in April 2023."

ASIC is seeking declarations, pecuniary penalties, an adverse publicity order and costs against ASX.

"We recognise the significance and serious nature of these proceedings. We cooperated fully with ASIC’s investigation and are now carefully reviewing and considering the allegations," says ASX CEO and managing director Helen Lofthouse, who took the reins of the market operator in August 2022 as a promotion from her prior role as group executive, markets.

"We play a critical role at the centre of Australia’s financial markets, and continue to focus on supporting and delivering for customers. We are committed to taking ASX forward, and have made strong progress as an organisation over the past two years."